Sovereign Wealth Funds Quarterly Newsletter

From the collaboration between Bocconi’s Sovereign Investment Lab and The Boston Consulting Group

The Leviathan Corner 03

Global outlook for SWF investments 05

Q4 2017 – Q1 2018 Deal Activity Summary 06

Key Trends 11

Sovereign Wealth Funds, Assets under management 13

with the scientific support of Foreword The global macroeconomic outlook has been favorable the increase domestic demand will generate inflationary for SWF over the period: Asian economies boomed with pressures and interest rate hikes, which have already the resumption of global trade, and the oil price rally taken place, curbing equity prices. Absent geopolitical relieved the hard-pressed public finances of producing events, the engines of SWF growth, oil prices, trade nations. FX reserves in EM grew in Asia, while in surplus, and strong equity markets will be a spent force MENA (Qatar apart) decreased at a slower pace. But in the foreseeable future. Furthermore, governments in we are most likely at a turning point, which will have emerging markets (especially energy producing nations) very deep implications in future SWF behavior. The will try to tap the SWF assets to equalize lost revenues protectionist tide is mounting under Trump policies and stabilize their domestic economies. The shut down of in USA, a country becoming this year the largest oil the Russian Reserve Fund and the change in strategy and producer and thus “energy independent”. A reduction in reornanization taking place in some GCC are the opening the US trade deficit will reduce foreign investments, and salvos of this big change.

Key facts and figures

18 148 $32.6 BN USD active SWFs completing an completed total reported deal acquisition in Q4-Q1 2018 SWF deals value in Q4-Q1 2018

16.8% 60% $14 BN USD of total investments in Q4 2017 was CIC’s share of deal value in Q4-Q1 2018 were in acquisition of Logicor the digital space for a Europe total of 48 deals

Sovereign Wealth Funds Quarterly Newsletter | 2 JV infrastructure fund between the Public Investment The Leviathan Corner Fund and Blackstone, or Panama $1.4 billion SWF’s The hidden cost of democracy: Norway decision to start investing in unlisted equities by end-2018, GPFG’s ban on private equity with a target allocation of 5-10% of assets. Second, the government’s decision came against recommendations Bernardo Bortolotti and Raphael Mimoun from both Norges Bank Investment Management and a government-appointed expert group that was set up last The Norwegian SWF (the Government Pension Fund August to discuss the opportunity to expand the scope of Global “GPFG”) is the largest fund by assets under the fund’s mandate beyond public assets and real estate. management around the world. Established in 1990, it received the first allocation in 1996, and then it steadily grew thanks to net cash flows contribution from all petroleum activities (including the dividends from the national oil company Statoil) to reach $1 trillion market Many experts told that it was value this year. GPFG is owned by the Ministry of naïve to believe that a democratic Finance, and professionally managed by a dedicated system could manage such a arm of the central bank, the Norges Bank Investment big cash flow in a sustainable Management. The MOF retains the decision-making “and responsible way, but the power, and determines the fund’s investment strategy, experience so far is that we have following advice from among others Norges Bank Investment Management and discussions in Parliament. been able to do exactly that. By law, the management mandate defines the investment universe and the fund’s strategic reference index. Jens Stoltenberg Former Prime Minister of Norway On April 11, 2018, the Government of Norway announced its decision not to expand the mandate to invest in unlisted equities on a general basis. Presented by Norway’s ” Minister of Finance Siv Jensen, the government’s white Beyond transparency and management fees, the MOF paper on the GPFG claimed that “unlisted equities would may have considered a “late entry” in an already crowded challenge key characteristics of the current management market translating into significant difficulties to source model [of the Fund], such as low asset management appropriate investment opportunities. Total amount of costs, closely tracking the benchmark and a high degree capital committed – but not yet invested – to private equity of transparency”1. has surpassed $1 trillion in 20172, reflecting a growing imbalance between demand and supply of PE investment This decision caught observers by surprise. First, because opportunities. Indeed, GPFG’s sheer size would make there has been increasing appetite of SWFs for PE it difficult to achieve even a small allocation target in investment and unlisted targets. Examples from various unlisted equities. Based on end-2017 assets, a target of geographies abound, including Saudi Arabia’s $ 40 billion

1 https://www.regjeringen.no/contentassets/569f03a08ee74350b3778f 2 http://docs.preqin.com/press/Fundraising-2017.pdf (page 2/6) dbb24dd406/en-gb/pdfs/stm201720180013000engpdfs.pdf (page 8/10)

Sovereign Wealth Funds Quarterly Newsletter | 3 5% would require approximately $50bn of investment, i.e. 2.6% allocated to unlisted real estate.5 Even without a level on par with the biggest private equity firms in the the materialization of a “Black Swan” scenario, the world. This partially explains why the fund has so far failed fund’s overexposure to Europe and the U.S. makes it to achieve its allocation target for unlisted real estate, vulnerable to growing risks such as demographic decline since getting approval to invest in this asset class in 2010 or increasing sovereign debt levels. Besides, the decision (2.6% of the portfolio at end-2017, i.e. half of the target). of the government to increase its equity exposure to 70% will need to be carefully and gradually implemented in Nevertheless, the decision of a blanket ban on an entire order to avoid buying stocks at inflated prices, as previous asset class is puzzling. Mandates typically design a decisions of the GPFG to increase its equity exposure general framework for strategic asset allocation which were made close to market highs (2007 and 1997). should not be affected by current market outlook but to fundamental contribution a given asset can provide Further to the government’s decision, Per Stomberg, to the long-term risk-adjusted performance.Indeed, from the director of the expert group, declared that it would a financial economics standpoint, there are compelling likely “come at a considerable cost in lower returns in reasons for the GPFG to expand its portfolio towards PE the future”.6 A back-of-the-envelope calculation of the investment. opportunity cost of not investing in PE, assuming a 12% return and a gradual portfolio rebalancing to reach a 10% Broadly speaking, investments in unlisted equities are allocation in this asset class in five years time, yields a particularly suited to the characteristics of the GPFG, cost estimate in the ballpark of $70bn over a ten year a long-term investor without explicit liabilities and thus holding period. able to harvest illiquidity premia over long horizons. Investment in PE would also allow the fund to boost its This statement begs a question: Why a respected, sub-par return. Between January 1, 1998 and end-2017, sophisticated organization with access to state-of-the- the fund generated only a 6.1% annual return3, certainly a art knowledge and skills deliberately leaves so much modest performance given the large exposure to stocks. money on the table? Our answer lies in the legacy of In 2017, the Fund reached a return of 13.7% return up an overtly prudent, ultra-conventional investment style only 0.7% on its benchmark index4. Key peers of the fund, imposed in these last two decades by the political system. such as Swedish AP funds, Canadian pension funds or Seeking widespread political legitimacy in an established the Netherlands’ pension fund (ABP), have consistently democracy founded on accountability and transparency, outperformed the GPFG while having more stringent rules decision makers opted for the easiest investment model on capital allocation (pension funds have to maintain to explain to their electorate, the globally diversified liquidity buffers to ensure payments to policy holders). portfolio of liquid stocks and bonds. The last decision on PE just follows in this wake. To some extent, the PE investment would also participate in reducing the Norwegian democracy imposes an excessive risk Fund’s exposure to stocks, which makes it vulnerable to aversion in the design and implementation of investment market fluctuations. In March 2018, the Fund published mandates, another form of political interference. This estimates indicating that – owing to the strong exposure governance conundrum has led to a rather paradoxical of the fund to listed equities – it could lose over 40% of situation whereby instead of investing in transformative its portfolio value in a single year, should adverse stock projects that could shape tomorrow’s global economy, market price developments combine with a strengthening the world’s biggest sovereign wealth fund is sticking to a of the Norwegian Krone. As of end-2017, the GPFG’s passive index tracking approach that is neither generating portfolio consisted of 97.4% of listed investments (66.6% development impact, nor yielding a strong return. in equity investments – to be increased to 70% in the medium-term – and 30.8% in fixed income) and

3 https://www.nbim.no/en/the-fund/return-on-the-fund/ 5 https://www.nbim.no/contentassets/db0b28dc13934aa6a56596d81d- 4 https://www.nbim.no/contentassets/49715a01ed684b1686ff- 47a33a/return-and-risk-2017---government-pension-fund-global.pdf 3c017f1efa12/press-conference---annual-report-2017---gpfg.pdf 6 https://www.ft.com/content/2092083c-3cb5-11e8-b7e0-52972418fec4

Sovereign Wealth Funds Quarterly Newsletter | 4 Global outlook for SWF investments The global macroeconomic outlook has been favourable Chart 1. OPEC reference basket (Dollars per barrel) to SWFs in the last semester. The cyclical upswing that 70 began in 2016 continued in 2017, with growth in the second half of the year above 4 percent, the strongest since the 65 second half of 2010. Global trade recovered in 2017 after 60 two sub-par years to an estimated real growth rate of 4.9 55 percent according to IMF. Emerging market and developing economies have a strong bearing in this process, with trade 50 growth rising from 2.2 percent in 2016 to 6.4 percent in 45 2017. Asian economies and particularly China performed 40 spectacularly well, and thanks to the improved outlook, 17 t- r-17 v-17 g-17 b-18 p-17 Jul-17 Jan-18 Jun-17 Oc

countries with a SWF in the Asia-Pacific region saw their Ap Fe Se Dec-17 Au No Mar-18 May-17 stock of foreign reserves growing 4.5% in 2017, reaching Source: OPEC $3.9 trillion by the end of Q3-18. Oil and natural gas price continue to rise, relieving the hard- pressed public finances of producing nations. The run-up Chart 2. that started in the second half of 2017 gained momentum, Current Account, latest available data, USD BN with the price of the OPEC’s reference basket rising 20 120 percent during the last semester to closing at 65 $/b. The price movement was mostly ascribed to the political turmoil 100 in Venezuela, which curbed supply by more than half a 80 million barrels per day, according to the World Bank. This 60 supply shock has been partly offset by a rise in non-OPEC 40 production especially from USA, a country that according 20 to the International Energy Agency could soon overtake Saudi Arabia and Russia as the world’s biggest oil producer 0 thanks to its large, unconventional resources. -20 -40 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 The oil-price rally allowed current account balances of 2012 2013 2014 2015 2016 2017 several countries in the MENA region to recover from the Asia-Pacific Europe MENA* deficits reported in the last two years. In 2017, according to Non-Pacific Asia Sub-Saharan Africa* the IMF, countries in the analytical group with fuel as source of export earning posted a $63.6 billion surplus, 1.8 percent *Due to lack of data, the following countries have been excluded: Lybia, Oman, United Arab Emirates and Palestine in the of GDP. However, the improved macroeconomic outlook did MENA region; Nigeria in the Sub-Saharan African region not prevent the stock of foreign reserves of many countries Source: IMF to continue to fall. Saudi Arabia limited its loss to 4 percent, while Qatar paid a huge toll to support its ailing economy still under the blockage, bringing down its reserves at the Chart 3. S&P Global 1200 (USD) end of the first quarter to $17 billion, a 50 percent decrease from last year. 2,600 The Asian cyclical upswing and the improved (albeit 2,500 2,400 not resolved) outlook in MENA is consistently reflected 2,300 in our numbers on the reported positive trend in SWF 2,200 equity investments. Total deal value doubled relative to 2,100 the last semester, reaching $32.6 billion at the end of 2,000 Q1 2018. Trade surplus SWFs added a stellar $15.6 to 1,900 17 t- r-17

their investments, while commodity funds $1.3 billion, v-17 g-17 b-18 p-17 Jul-17 Jan-18 Jun-17 Oc Ap Fe Se Dec-17 Au No Mar-18 nothing spectacular in absolute terms but still a 40 percent May-17 increase relative to a very quiet 2017. Source: S&P Dow Jones Indices

Sovereign Wealth Funds Quarterly Newsletter | 5 2017 will be recorded as a year of recovery for SWFs of the overheating of the American economy after the and their countries of origin, as the rise in oil price gave announcement of huge tax cuts, and they have to deal some fiscal air back to Gulf countries and the rebound with the non-trivial issue of the return to a more ordinary of global trade has benefited exporting countries, in monetary policy, with the progressive end of the bond particular in the Asia-Pacific region. 2018 had a promising buying program of the European Central Bank and raising start from a macroeconomic perspective, but it may turn interest rates in the US. sour as soon as markets and investor will start realizing The protectionist tide mounting under Trump’s policies the fundamental changes that are occurring in the global could effectively bring about a reduction in the US trade economy across the board. deficit and trade in general, with the ultimate consequence President Trump’s “America First” policy shifted from of curbing global growth and foreign investment by announcements to execution. As we write, a steep exporting nations. Absent major events and policy increase in tariffs on steel and aluminium from Mexico, changes, the engines of SWF asset growth, oil prices, Canada, and the European Union has taken effect, trade surplus, and strong equity markets will be a spent opening the concrete possibility of a trade war which force in the foreseeable future. Furthermore, governments might involve US trade partners, including China. This in emerging markets (especially energy producing nations) has had tangible consequences on investors’ sentiment: will try to tap the SWF assets to equalize lost revenues at the announcement of these trade barriers early in and stabilize their domestic economies. The shutdown of March markets tumbled again for the second time in a the Russian Reserve Fund and the change in strategy and few weeks. Markets experienced already a correction reorganization taking place in some GCC countries are early in February due to fear of raising inflation as a result the opening salvoes of this big change.

Chart 4. International Liquidity, Total Reserves excluding Gold (USD BN) Arabia

3,200 China* Saudi March 2017

3,100 March 2018 Korea* South 500 a Russi 400 Singapore* Malaysia * *

300 a * UAE* Libya* Zealand* n Norway

100 Australi Vietnam* Tome & Principe** Nigeria* Kuwait Morocco Qatar* New Angola* Oman Kazakhstan Azerbaijan Ireland Brunei** Bahrai East Timor* Sao 0

*China, South Korea, Singapore, UAE, Nigeria, New Zealand, Qatar, Angola, Azerbaijan, East Timor latest available data February 2018 ** Libya, Vietnam, Brunei, Sao Tome & Principe latest available data December 2017 Source: IMF

Q4 2017 – Q1 2018 Deal Activity Summary

Activity In the last quarter of 2017 and the first one of 2018 we SWFs were considerably more active in Q4: 80 deals observed 18 SWFs out of the 38 included in the SIL jointly worth $26.3 billion were completed in this quarter, database completing 148 direct equity investments with a representing around 80% of the total value in the total publicly reported value of $32.6 billion, making this observed period. A significant part of the invested value semester one of the strongest for SWFs in recent history. in this quarter comes from the Logicor acquisition by CIC, As compared to the previous semester, investment value however, even without this deal invested value in Q4 doubled and deals increased by 45 percent. Thanks to a remains almost double than in Q1. busy Q4, SWFs closed 2017 with a total of $56.8 billion of investments which represents a turning point for SWF investment after two consecutive years of decline.

Sovereign Wealth Funds Quarterly Newsletter | 6 Deal highlights

In one of the largest private equity deals Europe has seen in a while, CIC bought 100% of European warehouse firm Logicor from private equity group Blackstone. Logicor, founded by Blackstone in 2012, is Europe’s largest owner of logistics and distribution properties, with around 13 million square meters storage capacity all around Europe. The Chinese fund payed $14 billion for the company, making this acquisition also one of the largest international Chinese takeovers on record.

Geography On a regional level we are witnessing a substantial shift back to Europe. Thanks to the Logicor deal, Europe has topped the rank as this semester’s most attractive market with 31 deals jointly worth around $19.6 billion or 60% of the overall SWF investment. Even if we exclude this transaction, Europe is still the second most attractive Chart 5. Total deal number and value market, losing closely to Asia – Pacific. If we consider the fact that 2016 was one of the worst years for SWF Deal value investment for the Old Continent, this represents a major Deals Mar turning point. In addition to this semester, the data show that the whole of 2017 was very positive for Europe. A Feb total of $24.8 billion was invested by SWFs in Europe this past year, more than double than the previous year’s Jan winner, North America, which was in 2017 the second most attractive region, with $11.5 billion of investments. Dec The UK was the single most attractive country this semester; however this is primarily due to the Logicor Nov deal which accounts for almost 95% of the $15.3 billion invested by SWFs in the country. The USA finished Oct second this semester with 36 deals worth $3.9 billion, a strong performance overall, although considerably lower 25000 15000 5000 0 0510 15 20 25 30 35 than the $6.3 billion from the previous semester. Source: Sovereign Investment Lab, Bocconi University Emerging markets attracted $7.8 billion of investment or around 30% of the total value, which is in line with the previous reporting period. However, 82% of this Chart 6. Total deal value split by geography investment was directed towards three countries: China, India and Singapore, placing them on the fourth, fifth and 3% 2% 1% sixth place respectively on the rank of most attractive 2% countries this semester. 2%

4% UK USA Ireland Deal highlights 8% China India is steadily gaining ground as one of the key India 47% emerging markets for SWF investment. While the Singapore 8% Denmark average ticket size is lower than that of other markets, Philippines this semester the country recorded two blockbuster Japan deals. In one of the biggest foreign investments in India’s Australia 11% real estate sector, GIC acquired a 33.34% stake in DLF Others Cyber City Developers (the rental arm of real estate 12% developer DLF) for $1.39 billion. GIC also participated in a capital raise for mortgage lender Housing Development Finance Corp, with around $800 million. Source: Sovereign Investment Lab, Bocconi University

Sovereign Wealth Funds Quarterly Newsletter | 7 Chart 7. Total deal number and value split by sector

Total deals by sector

Personal & Business Services 1% 1% 1% 1% 1% 1% Banking, Insurance, Trading 1% 1% 1% 1% Real Estate 1% Healthcare, Medical Equipment, Pharmaceutical Products

Food Products 3% 1% 1% 1% 1% 1% 1% Transportation 3% 1% 1% 1% 1% Infrastructure & Utilities 3% 1% 32% Restaurants, Hotels, Motels

3% Business Equipment 3% Fabricated Products & Machinery 4% 3% Communications 3% 32% Construction & Construction Materials 3% 5% Chemicals

Business Supplies and Shipping Containers 4% Apparel

7% Beer & Liquor

5% Consumer Goods

20% Retail 9% Aircraft, Autos, Ships & Trains

7% Precious Metals, Non-Metallic, and Industrial Metal Mining

Petroleum & Natural Gas

20% 9%

0% 0% 0% 0% 0% 0% Total1% deal0% value 0% 1% 1%1% by sector 0%

2% 0% Transportation 0% 3% 0% 0% 0% 0% Personal & Business Services 1% 0% 0% 1% 6% 1%1% 0% Healthcare, Medical Equipment, Pharmaceutical Products Real Estate

2% Infrastructure & Utilities 3% 8% Banking, Insurance, Trading

6% 45% Communications Business Equipment

Food Products

9%8% Aircraft, Autos, Ships & Trains 45% Restaurants, Hotels, Motels Business Supplies and Shipping Containers

Chemicals

9% 10% Construction & Construction Materials Precious Metals, Non-Metallic, and Industrial Metal Mining

12% Retail

Fabricated Products & Machinery

10% Consumer Goods

Petroleum & Natural Gas

12% Beer & Liquor

Apparel

Source: Sovereign Investment Lab, Bocconi University

Sovereign Wealth Funds Quarterly Newsletter | 8 Sectors while Temasek this semester was primarily focused on the services industry and in IT. The lion’s share of value reported in the transportation sector is due to the Logicor mega-deal, which by itself Despite the oil price rally, commodity funded SWFs accounts for 44% of total SWF investments in this remained quiet again this semester: they completed semester. Apart from this deal, SWFs did not make any 36 deals worth $4.5 billion. This is only 5 more deals other significant investment in the sector. The situation is compared to the previous semester and around $1.3 identical in the healthcare sector, where GIC’s investment billion more in invested value. Although low in absolute in Irish pharmaceutical company Allergan accounts for terms, this still represents a 40% increase compared to almost 90% of the investments in the sector. the previous semester. Digital ventures continue to be a top priority in SWFs’ Mubadala was the only commodity SWF in the period that agendas. The majority of these deals fall under the crossed the one billion mark in investments. ADIA had personal & business service sector and in this reporting another quiet semester; however, also in this semester period, this sector attracted 48 deals worth $3.7 billion. ADIA had a strong focus on India: 6 out of its 8 deals were Out of the 48 deals, 38 represent investments in IT-linked made there. companies.

SWFs started investing in “safe assets” out of necessity, Chart 8. Deal model split however it seems “safe assets” are slowly becoming a staple investment for them. This sector, bunching alternatives such as real estate assets and infrastructure, attracted 23 deals worth $5.8bn.

31% Deal highlights

The sovereign venture capitalist role keeps gaining momentum. One of the largest tech investments SWFs took part of in this semester was the $4 billion financing round of Uber’s Chinese rival Didi Chuxing 1% 67% 1% Technology Co. The round valued Didi at over $50 billion and the company said that the collected cash would be used for international expansion and further investments in AI. Mubadala was one of the key investors. Standalone investments Investments with only SWFs or other sovereign entities Investments with SWFs and private investors Investments with only private partners After years of declining investments in the financial sector, for the second semester in a row the sector manages Source: Sovereign Investment Lab, Bocconi University to attract a considerable portion of SWFs’ investments. Starting from October 2017 until April this year, SWFs made 30 investments worth $2 billion in the industry. The Chart 9. Source of co-investments in SWF deals interest towards emerging markets continues to raise as the data show that two thirds of the deals were done in 0% countries as India, China and Singapore. 2% 2%

Funds 11%

Non – commodity SWFs dominate their commodity funded 33% counterparts in this semester as well. With 112 completed transactions worth $28 billion they account for 75% of all deals in the semester and 86% of total invested value. Both figures are up from the previous semester, in which trade surplus SWFs completed 71 transactions worth $12.4 billion.

CIC takes the trophy for the biggest spender this semester 52% primarily due to the Logicor deal, in addition to this Banks acquisition CIC made 6 other investments for a total of Misc. Private equity funds almost $16 billion. Singaporean funds GIC and Temasek, Other financial investors once again, are leaders in terms of activity as they are Strategic investors responsible for around 60% of the deals this semester. Pension funds GIC was involved in all main geographies and sectors, Source: Sovereign Investment Lab, Bocconi University

Sovereign Wealth Funds Quarterly Newsletter | 9 Table 1. SWF ranking by deal value

SWF name USD MM SWF name Number of Deals

China Investment Corporation (CIC) 15987 Temasek Holdings Pte Ltd 49 GIC Pte Ltd 10450 GIC Pte Ltd 42 Mubadala Investment Company PJSC 2121 Abu Dhabi Investment Authority (ADIA) 8 Temasek Holdings Pte Ltd 1274 Mubadala Investment Company PJSC 7 Qatar Investment Authority (QIA) 808 China Investment Corporation (CIC) 7 Abu Dhabi Investment Authority (ADIA) 748 Ireland Strategic Investment Fund 6 Public Investment Fund (PIF) 475 Government Pension Fund - Global 5 Ireland Strategic Investment Fund 162 Kuwait Investment Authority (KIA) 4 Government Pension Fund - Global 117 Qatar Investment Authority (QIA) 3 Future Fund 111 Investment Corporation of Dubai 2 Russian Direct Investment Fund (RDIF) 101 Russian Direct Investment Fund (RDIF) 2 Oman Investment Fund 93 Future Fund 2 New Zealand Superannuation Fund 73 Public Investment Fund (PIF) 2 Investment Corporation of Dubai 56 Mumtalakat Holding Company 2 Kuwait Investment Authority (KIA) 3 Khazanah Nasional Bhd 2 Khazanah Nasional Bhd 1 New Zealand Superannuation Fund 2 Mumtalakat Holding Company n.a. Oman Investment Fund 2 State General Reserve Fund n.a. State General Reserve Fund 1

Total 32579 Total 148

Source: Sovereign Investment Lab, Bocconi University Source: Sovereign Investment Lab, Bocconi University

Table 2. Q4_Q1 Top deals

Target Deal size Fund Target name Sector Stake country (USD MM) China Investment Corporation Logicor Europe Ltd UK Transportation $14,418.37 100.00% (CIC) Healthcare, Medical GIC Pte Ltd Allergan Plc Ireland Equipment, Pharma- $2,939.96 5.11% ceutical Products Mubadala Investment Company Xiaoju Kuaizhi Inc. Personal & Business China $2,000.00* .* PJSC (Didi Chuxing) Services

GIC Pte Ltd Dlf Cyber City Developers Ltd India Real Estate $1,389.29 33.34%

China Investment Corporation Equis Energy Dvlps Pte Ltd Singapore Infrastructure & Utilities $1,233.33 * 33.00%* (CIC)

*Estimated Investment Value Source: Sovereign Investment Lab, Bocconi University

Sovereign Wealth Funds Quarterly Newsletter | 10 Key Trends

ESG Investing Environment, Social and Governance (ESG) Investing has in. These qualities make SWFs ideal investors for high- experienced significant growth in recent years, as there is growth technology companies that value an incubation a growing conviction among investors that sustainability period without pressure to meet aggressive growth targets will also drive financial performance through long-term and return expectations. value creation. There is especially strong appetite to invest in tech Embedding sustainable targets into the investment startups from sovereign funds in both Asia-Pacific and process was one of the key topics of last year’s annual the Middle East, as they plan to leverage innovation conference hosted by the International Forum of SWFs and technology to drive economic-diversification. Saudi in Kazakhstan. Results from “early adopters” of ESG PIF’s recently invested alongside Alibaba and Temasek investing are so far mixed, as Norway’s sovereign wealth Holdings in Magic Leap, a U.S. startup developing fund stated in one of its latest reports that it has returned virtual retinal display. In the UAE, Mubadala Investment 1.6 percentage points less on an annualized basis over Company is planning to invest $400 million in early-stage the last 12 years because it excluded some stocks for startups in the U.S. after setting up an office in Silicon ethical reasons. In a more recent development, the Valley last year. Norwegian fund has also set out strong measures against China Investment Corporation launched a €150 million corruption in the 8,985 companies it invests in. joint venture with Ireland Strategic Investment Fund, to Last December, six sovereign wealth funds including invest in Chinese tech companies interested in entering Abu Dhabi Investment Authority, Qatar Investment the European market, as well as Irish companies planning Authority, Kuwait Investment Authority, New Zealand to expand into China. Singapore’s Temasek invested $1.5 Superannuation Fund, Norges Bank Investment billion in the Indonesian ride-hailing firm Go-Jek, while Management, and Public Investment Fund of Saudi GIC participated in an $818 million Series C round for Arabia, formed a working group to develop a sustainable Chinese car sales platform Chehaoduo. New Zealand’s framework to address climate change issues and integrate Super Fund made a rare $65 million direct investment into related risks and opportunities in the management of U.S. recycling startup Rubicon Global. their long-term assets. New Zealand Super fund adjusts Within tech investing, healthcare seems to be an area its investments in anticipation of damage from global of growing interest. Mubadala Ventures, the VC arm of warming, and it has set out targets to reduce its carbon Mubadala Investment Company, participated in a US$ footprint. 110 million February round in CollectiveHealth, a San Francisco-based startup offering tech-savvy tools for Technology/VC Investment managing health benefits. In May, telemedicine platform Doctis has sold a minority stake to a consortium led by the The tech sector has been particularly attractive to Russian Direct Investment Fund and the Russia-Japan sovereign investors in the recent past, primarily due to Investment Fund. potentially high growth rates and return multiples not easily replicable in other sectors. Sovereign investors are increasingly engaging with early- Real Estate investments stage tech startups in order to benefit from the global Sovereign investors in the recent months have continued technology sector’s growth, and to realize rapid returns for to seek opportunities in property and landmark their shareholders. The attraction seems to be reciprocal acquisitions. Singapore’s GIC is believed to have invested as, with longer investment horizons than venture capital $3 billion in secured debt to finance the sale of The funds, SWFs can provide patient capital, while also Center, one of the world’s most expensive buildings in offering access to emerging and growing markets. Asia. In a more recent development, GIC has invested Jeremy Kranz, head of the tech investment group within $177 million in JustCo to develop co-working platform Singapore’s GIC, recently stated that GIC is seeking across Asia. Several SWFs are also realizing their “lifetime relationships” with the companies they invest real estate investments. In March, Norges Bank Real

Sovereign Wealth Funds Quarterly Newsletter | 11 Estate Management agreed to sell its stake in Meudon Egypt Campus, an office property of 45,000 square meters, to The Egyptian government has approved a bill to establish PGIM Real Estate for €128 million. About a month later, a sovereign wealth fund with $11.3 billion in initial the partnership between Norway’s SWF and Prologis capital last month. Some of its capital are raised by the sold their eight European logistics properties to a fund privatization and sale of state-owned entities. The fund managed by Ares Management. GIC also sold the 740- will managed unused state assets and has the authority to room Arizona Biltmore hotel to Blackstone for $403 million establish sub-funds and participate in similar Arab funds in April. from neighboring countries.

Global Round-Up Lebanon Lebanon is planning to set up a sovereign investment Norway vehicle funded through revenues from oil and gas. Earlier The Government Pension Fund of Norway, the world’s this year, the Lebanese president, Michel Aoun, said that largest Sovereign Wealth Fund, became the first fund the SWF will help preserve wealth for future generations to reach the $1 trillion mark in AuMs last year. As strong with returns invested to finance development projects in global stock markets boosted the value of its portfolio, the Lebanon. fund doubled its return to 13.7 percent in 2017, up from 6.9 percent in 2016. It has become an increasingly activist Kenya shareholder over the years, speaking out on various Kenya is considering the possibility of establishing its topics such as executive compensation, ethical behaviors, first sovereign wealth fund by using profits from its state- and child labor. It is also streamlining its bond portfolio by owned enterprises. The new SWF will strategically help shortening maturities and cutting corporate debt and fixed advance Kenya’s commercial interest internationally. The income in 20 currencies to only dollars, euros and pounds. proposed law and regulations to establish such fund have However, Norway’s government outlined regulations to not yet been approved by the parliament. prohibit the nation’s SWF from investing in private equity citing lack of transparency and high fees.

Sovereign Wealth Funds Quarterly Newsletter | 12 Sovereign Wealth Funds, Assets under management

Inception Source AUM 2017 Country Fund name year of funds (USD BN)

Norway Government Pension Fund – Global£ 1990 Commodity (Oil & Gas) 1034.18

UAE-Abu Dhabi Abu Dhabi Investment Authority† 1976 Commodity (Oil & Gas) 828.00

China China Investment Corporation** 2007 Trade Surplus 813.51

Kuwait Kuwait Investment Authority† 1953 Commodity (Oil & Gas) 524.00

Government of Singapore Investment Singapore 1981 Trade Surplus 390.00 Corporationn†

Qatar Qatar Investment Authority† 2005 Commodity (Oil & Gas) 320.00

China National Social Security Fund† 2000 Trade Surplus 295.00

UAE - Dubai Investment Corporation of Dubaiϭ 2006 Commodity (Oil & Gas) 214.21

Saudi Arabia Public Investment Fund† 1971 Commodity (Oil & Gas) 250.00

Singapore Temasek Holdingsµ 1974 Trade Surplus 197.00

Russia National Wealth Fund and Reserve Fund66 2008 Commodity (Oil & Gas) 63.91

Australia Australian Future Fundϭ 2006 Non-Commodity 102.48

Republic of Korea Korea Investment Corporation** 2005 Government-Linked Firms 110.80

Kazakhstan Kazakhstan National Fund** 2000 Commodity (Oil & Gas) 64.20

UAE-Abu Dhabi Mubadala Investment Company PJSC£ 2017 Commodity (Oil & Gas) 127.81

Libya Libyan Investment Authority† 2006 Commodity (Oil & Gas) 66.00

Brunei Brunei Investment Agency† 1983 Commodity (Oil & Gas) 40.00

Malaysia Khazanah Nasional Berhard£ 1993 Government-Linked Firms 38.85

Azerbaijan State Oil Fund of Azerbaijan*** 1999 Commodity (Oil & Gas) 37.63

New Zealand New Zealand Superannuation Fund66 2001 Non-Commodity 27.14

East Timor Timor-Leste Petroleum Fund† 2005 Commodity (Oil & Gas) 16.60

UAE Emirates Investment Authority† 2007 Commodity (Oil & Gas) 34.00

UAE-Abu Dhabi Abu Dhabi Investment Council† 2007 Commodity (Oil & Gas) 123.00

UAE - Dubai Istithmar World* 2003 Government-Linked Firms 11.50

Bahrain Mumtalakat Holding Company** 2006 Government-Linked Firms 10.40

Sovereign Wealth Funds Quarterly Newsletter | 13 Inception Source AUM 2017 Country Fund name year of funds (USD BN)

UAE - Dubai Dubai International Financial Center** 2002 Government-Linked Firms 11.00

Russia Russian Direct Investment Fund† 2011 Non-Commodity 10.00

Oman State General Reserve Fund* 1980 Commodity (Oil & Gas) 9.15

Ireland Ireland Strategic Investment Fund6 2001 Non-Commodity 19.70

Oman Oman Investment Fund† 2006 Commodity (Oil & Gas) 6.00

Angola Fundo Soberano de Angola† 2012 Commodity (Oil & Gas) 4.60

UAE-Ras Al Khaimah Ras Al Khaimah Investment Authority† 2005 Commodity (Oil & Gas) 1.20

Nigeria Future Generations Fund** 2012 Commodity (Oil & Gas) 0.51

Vietnam State Capital Investment Corporation£ß 2005 Government-Linked Firms 2.76

Palestine Palestine Investment Fund** 2003 Non-Commodity 0.86

Kiribati Revenue Equalization Reserve Fund** 1956 Commodity (Phosphates) 0.63

Fonds Marocain de Développement Kingdom of Morocco 2011 Government-Linked Firms 0.20 Touristique**

São Tomé & Principe National Oil Account* 2004 Commodity (Oil & Gas) < 0,01

Total Oil & Gas 3,765.01

Total Trade Surplus 1,695.51

Total Other 346.31

Total AUM 5806.83

£ AUM as of December 31, 2017. † Estimate by SWF Institute as of April 2018. ** AUM as of December 31, 2016. ¥ AUM as of March 31, 2016. µ AUM as of March 31, 2017. For Temasek, the net portfolio value is reported. ϭ AUM as of June 30, 2017. * Sovereign Investment Laboratory’s estimate of assets under management (AUM) as of December 2017. State General Reserve Fund as of December 2016. 66 As of May 1, 2018. The Russian Reserve Fund is as of January 1, 2018 exhausted. *** As of April 1, 2018. ß For the State Capital Investment Corporation (Vietnam) the charter capital was reported in previous repots/newsletters. Now the total AUM are reported.

SWFs of Morocco and Palestine have been added to the SIL list in 2015. Public Investment Fund has been added to the SIL list in 2016.

Sovereign Wealth Funds Quarterly Newsletter | 14 Team & Contacts

Bernardo Bortolotti Markus Massi Alessandro Scortecci Director Partner & MD Principal Sovereign Investment Lab The Boston Consulting Group The Boston Consulting Group Bocconi University

Raphael Mimoun Giacomo Loss Nikola Trajkov Junior Researcher Senior Researcher Junior Researcher Sovereign Investment Lab Sovereign Investment Lab Sovereign Investment Lab Bocconi University Bocconi University Bocconi University

For enquiries Sovereign Investment Lab, The Boston Consulting Group Bocconi University Office Park at Dubai Internet City Via G. Roentgen, 1 Block D, 4th Floor PO Box 32257 20136 Milano Dubai, United Arab Emirates tel. +39.02 58365306 tel. +971 44480300 fax +39.02 58365343 fax +971 44480333 e-mail: [email protected] e-mail: [email protected]

Sovereign Wealth Funds Quarterly Newsletter | 15